Asset Management and Investment Funds
The predominant theme for fund managers throughout 2022 was the implementation of the Sustainable Finance Disclosure Regulation ("SFDR") Level 2 requirements and obligations relating to the integration of sustainability risks by fund management companies set out in amendments to the UCITS Directive and AIFMD Level 2 measures.
Sustainable finance will continue to be the dominant theme for 2023, with a number of key developments expected during the coming months.
Further Clarifications from the European Commission
As industry stakeholders continue to grapple with key issues under the SFDR, including the definition of "sustainable investments" and what is meant by "consideration" of principal adverse impacts of investment decisions on sustainability factors, it is hoped that the European Commission's ("Commission") responses to the queries submitted to it by the European Supervisory Authorities ("ESAs") in September 2022 will provide some useful clarifications. We expect the Commission to answer the ESAs' queries in Q2 2023.
Consultation on Fund Names' using ESG or Sustainability-related Terms
The European Securities and Markets Authority's ("ESMA") consultation on fund names using ESG or sustainability-related terms closed on 20 February 2023. ESMA sought stakeholders' views on the introduction of quantitative thresholds for the minimum proportion of investments sufficient to support the use of ESG or sustainability-related terms in funds' names. ESMA has proposed:
- a quantitative threshold of 80% for the use of ESG related words;
- an additional threshold of 50% for the use of "sustainable" or any sustainability-related term, as part of the 80% threshold;
- the application of minimum safeguards to all investments for funds using such terms (exclusion criteria to be based on the exclusion criteria applicable to Paris-aligned Benchmarks in the Level 2 measures adopted under the Benchmark Regulation); and
- additional considerations for specific types of funds (index and impact funds). ESMA has suggested that funds using the word "impact" or "impact investing" or any other impact-related term in their name should meet the proposed thresholds and additionally, make investments with the intention to generate positive and measurable social and environmental impacts alongside a financial return.
Call for Evidence on Greenwashing
The ESAs' Call for Evidence on Greenwashing closed on 10 January 2023 and the ESAs will provide advice to the Commission in relation to greenwashing risks and occurrences once the submissions have been considered.
Amended SFDR Templates to include Nuclear and Gas Activities
Legislation introducing updated templates for pre-contractual and periodic disclosures under the SFDR applies from 20 February 2023. The updated templates, which are set out in annexes to the SFDR Level 2 regulation, have been amended to include disclosures relating to investments in nuclear and gas activities under the EU Taxonomy Regulation. With fund managers having just completed a filing process at the end of 2022 to comply with SFDR Level 2, it is a positive development that the Central Bank of Ireland ("Central Bank") has confirmed that it is introducing a fast-track filing process in relation to the updated annexes.
It has also clarified that existing funds are expected to update their pre-contractual disclosures "as soon as possible and at the earliest available opportunity". The applicable conditions are set out in a Central Bank publication issued on 20 February 2023 setting out the filing process in relation to the updated annexes.
Central Bank Spot Checks and Thematic Review
When the Central Bank confirmed the conditions applicable to the fast track filing process to implement the SFDR Level 2 requirements, it indicated that it would undertake a review of a sample of the submissions received and would engage with selected applicants on a bilateral basis where questions arise. It is expected that the Central Bank will issue feedback on these SFDR Level 2 filing spot checks in the coming weeks. This feedback should assist managers with completion of the disclosures in future.
The Central Bank has also commenced a thematic review of SFDR implementation. The review currently involves examining data currently held by the Central Bank and the Central Bank is examining how the self-declared SFDR designation aligns to the portfolio composition and strategy being pursued. The current intention is not to call on industry for additional data. The Central Bank expects to present the findings from the thematic review in Q1 / early Q2 2023.
"And I am very aware of the fears within the financial sector around legal and reputational risks. And of course investors, supervisors and civil society are concerned because there is a lack of clarity, this creates opportunities for greenwashing. So in this vein, we are working to address some of these concerns and early next year we will publish a first set of Q&As to try and bring some clarity on specific points."
Commissioner McGuinness at the ECON-ENVI Joint Committee Meeting 5 December 2022